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EX-32.2 - EXHIBIT 32.2 - Western New England Bancorp, Inc.a6712604ex32-2.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
______________________

FORM 10-Q

S           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

OR

£           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____.

Commission file number 001-16767

Westfield Financial, Inc.
 (Exact name of registrant as specified in its charter)

Massachusetts
73-1627673
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

141 Elm Street, Westfield, Massachusetts 01086
(Address of principal executive offices)
(Zip Code)

(413) 568-1911
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes S  No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes £  No £.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
 
Large accelerated filer o Accelerated filer x
   
Non-accelerated filer o Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes £  No S

At May 2, 2011 the registrant had 28,045,510 shares of common stock, $0.01 par value, issued and outstanding.
 
 
 

 
 
TABLE OF CONTENTS
 
Page

FORWARD-LOOKING STATEMENTS

PART I – FINANCIAL INFORMATION
 
     
         
      1  
           
      2  
           
      3  
           
      4  
           
 
    5  
           
    25  
           
    32  
           
    33  
           
PART II – OTHER INFORMATION
       
           
    33  
           
    33  
           
    33  
           
    34  
           
    34  
           
    34  
           
    34  
           
       
           
       
 
 
 

 
 
FORWARD – LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements.”  These forward-looking statements are made in good faith pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.  The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements.  These forward-looking statements may be subject to significant known and unknown risks, uncertainties and other factors, including, but not limited to, changes in the real estate market or local economy, changes in interest rates, changes in laws and regulations to which we are subject, and competition in our primary market area.

Although we believe that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements.  You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  Westfield Financial undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 
i

 
 
PART I – FINANCIAL INFORMATION

 
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
(Dollars in thousands)
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
ASSETS
           
Cash and due from banks
  $ 9,151     $ 9,247  
Federal funds sold
    10       13  
Interest-bearing deposits and other short term investments
    4,446       2,351  
             CASH AND CASH EQUIVALENTS
    13,607       11,611  
                 
Securities available for sale - at fair value
    623,414       642,467  
                 
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER RESTRICTED STOCK - AT COST
    12,354       12,282  
                 
LOANS - Net of allowance for loan losses of $6,999 at March 31, 2011 and $6,934 at December 31, 2010
    518,357       502,392  
                 
PREMISES AND EQUIPMENT, Net
    11,368       11,603  
                 
ACCRUED INTEREST RECEIVABLE
    4,248       4,279  
                 
BANK-OWNED LIFE INSURANCE
    42,860       40,494  
                 
DEFERRED TAX ASSET, Net
    9,425       8,811  
                 
OTHER REAL ESTATE OWNED
    223       223  
                 
OTHER ASSETS
    4,959       5,327  
TOTAL ASSETS
  $ 1,240,815     $ 1,239,489  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
LIABILITIES:
               
DEPOSITS :
               
    Noninterest-bearing
  $ 85,471     $ 85,217  
    Interest-bearing
    622,064       615,118  
          Total deposits
    707,535       700,335  
                 
SHORT-TERM BORROWINGS
    55,138       62,937  
                 
LONG-TERM DEBT
    250,230       238,151  
SECURITIES PENDING SETTLEMENT
    -       7,791  
OTHER LIABILITIES
    8,556       9,030  
TOTAL LIABILITIES
    1,021,459       1,018,244  
                 
SHAREHOLDERS' EQUITY:
               
Preferred stock - $.01 par value, 5,000,000 shares authorized, None outstanding at March 31, 2011 and December 31, 2010
    -       -  
Common stock - $.01 par value, 75,000,000 shares authorized, 28,045,510 shares issued and outstanding at March 31, 2011; 28,166,419 shares issued and outstanding at December 31, 2010
    280       282  
Additional paid-in capital
    181,044       181,842  
Unearned compensation - ESOP
    (9,556 )     (9,701 )
Unearned compensation - Equity Incentive Plan
    (1,867 )     (2,158 )
Retained earnings
    56,032       56,496  
Accumulated other comprehensive loss
    (6,577 )     (5,516 )
   Total shareholders' equity
    219,356       221,245  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 1,240,815     $ 1,239,489  
   
See accompanying notes to unaudited consolidated financial statements.
 
 
 
 
1

 
 
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
 
   
Three Months
 
   
Ended March 31,
 
   
2011
   
2010
 
INTEREST AND DIVIDEND INCOME:
           
Debt securities, taxable
  $ 4,811     $ 5,361  
Residential and commercial real estate loans
    4,674       4,476  
Commercial and industrial loans
    1,443       1,635  
Debt securities, tax-exempt
    419       371  
Consumer loans
    49       56  
Equity securities
    47       50  
Federal funds sold, interest-bearing deposits and other investments
    14       6  
Total interest and dividend income
    11,457       11,955  
INTEREST EXPENSE:
               
Deposits
    2,106       2,615  
Long-term debt
    1,645       1,586  
Short-term borrowings
    59       63  
Total interest expense
    3,810       4,264  
Net interest and dividend income
    7,647       7,691  
PROVISION FOR LOAN LOSSES
    339       500  
Net interest and dividend income after provision for loan losses
    7,308       7,191  
                 
NONINTEREST INCOME (LOSS):
               
Total other-than-temporary impairment losses on debt securities
    (345 )     (1,071 )
Portion of other-than-temporary impairment losses recognized in accumulated other comprehensive loss on debt securities
    313       971  
Net other-than-temporary impairment losses recognized in income
    (32 )     (100 )
Service charges and fees
    441       492  
Income from bank-owned life insurance
    366       375  
Gain on sales of securities, net
    31       186  
Gain on disposal of other real estate owned
    -       7  
Total noninterest income
    806       960  
NONINTEREST EXPENSE:
               
Salaries and employees benefits
    3,953       3,817  
Occupancy
    678       660  
Computer operations
    486       485  
Professional fees
    439       423  
OREO expense
    8       243  
FDIC insurance assessment
    208       163  
Other
    768       604  
Total noninterest expense
    6,540       6,395  
INCOME BEFORE INCOME TAXES
    1,574       1,756  
INCOME TAX PROVISION
    288       402  
NET INCOME
  $ 1,286     $ 1,354  
                 
EARNINGS PER COMMON SHARE:
               
Basic earnings per share
  $ 0.05     $ 0.05  
Weighted average shares outstanding
    26,746,102       28,186,887  
Diluted earnings per share
  $ 0.05     $ 0.05  
Weighted average diluted shares outstanding
    26,875,244       28,439,241  
   
See accompanying notes to unaudited consolidated financial statements.
 
 
 
 
2

 

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(Dollars in thousands, except share data)
                      Unearned           Accumulated        
      Common Stock     Additional    
Unearned
    Compensation            Other        
   
Shares
   
Par
Value
   
Paid-in
Capital
   
Compensation
- ESOP
   
- Equity
Incentive Plan
   
Retained
Earnings
   
Comprehensive
Income (Loss)
   
Total
 
BALANCE AT DECEMBER 31, 2009
    29,818,526     $ 298     $ 193,609     $ (10,299 )   $ (3,248 )   $ 69,253     $ (2,314 )   $ 247,299  
Comprehensive income:
                                                               
Net income
    -       -       -       -       -       1,354       -       1,354  
Net unrealized losses on securities available
    for sale arising during the period, net
    reclassification adjustment and tax effects
    -       -       -       -       -       -       (384 )     (384 )
Change in pension gains or losses and
    transition assets, net of tax
    -       -       -       -       -       -       18       18  
         Total comprehensive income
                                                            988  
Common stock held by ESOP committed to be
    released (89,040 shares)
    -       -       35       150       -       -       -       185  
Share-based compensation - stock options
    -       -       199       -       -       -       -       199  
Share-based compensation - equity incentive
    plan
    -       -       -       -       289       -       -       289  
Excess tax benefits from equity incentive plan
    -       -       6       -       -       -       -       6  
Common stock repurchased
    (236,814 )     (2 )     (1,944 )     -       -       -       -       (1,946 )
Cash dividends declared ($0.05 per share)
    -       -       -       -       -       (1,410 )     -       (1,410 )
BALANCE AT MARCH 31, 2010
    29,581,712     $ 296     $ 191,905     $ (10,149 )   $ (2,959 )   $ 69,197     $ (2,680 )   $ 245,610  
                                                                 
                                                                 
BALANCE AT DECEMBER 31, 2010
    28,166,419     $ 282     $ 181,842     $ (9,701 )   $ (2,158 )   $ 56,496     $ (5,516 )   $ 221,245  
Comprehensive income:
                                                               
Net income
    -       -       -       -       -       1,286       -       1,286  
Net unrealized losses on securities available
    for sale arising during the period, net of
    reclassification adjustment and tax effects
    -       -       -       -       -       -       (1,078 )     (1,078 )
Change in pension gains or losses and
    transition assets, net of tax
    -       -       -       -       -       -       17       17  
             Total comprehensive income
                                                            225  
Common stock held by ESOP committed to be
    released (86,586 shares)
    -       -       46       145       -       -       -       191  
Share-based compensation - stock options
    -       -       200       -       -       -       -       200  
Share-based compensation - equity incentive
    plan
    -       -       -       -       291       -       -       291  
Excess tax benefits from equity incentive plan
    -       -       5       -       -       -       -       5  
Common stock repurchased
    (155,555 )     (2 )     (1,361 )     -       -       -       -       (1,363 )
Issuance of common stock in connection with
    stock option exercises
    34,646       -       294       -       -       (141 )     -       153  
Excess tax benefit in connection with stock
    option exercises
    -       -       18       -       -       -       -       18  
Cash dividends declared ($0.06 per share)
    -       -       -       -       -       (1,609 )     -       (1,609 )
BALANCE AT MARCH 31, 2011
    28,045,510     $ 280     $ 181,044     $ (9,556 )   $ (1,867 )   $ 56,032     $ (6,577 )   $ 219,356  
See the accompanying notes to unaudited consolidated financial statements.
 
 
 
3

 
 
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
 
 
(Dollars in thousands)
 
   
Three Months Ended March 31,
 
   
2011
   
2010
 
OPERATING ACTIVITIES:
           
Net income
  $ 1,286     $ 1,354  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    339       500  
Depreciation and amortization of premises and equipment
    307       318  
Net amortization of premiums and discounts on securities, mortgage-backed securities and mortgage loans
    904       1,409  
Share-based compensation expense
    491       488  
Amortization of ESOP expense
    191       185  
Excess tax benefits from equity incentive plan
    (5 )     (6 )
Excess tax benefits in connection with stock option exercises
    (18 )     -  
Net gains on sales of securities
    (31 )     (186 )
Other-than-temporary impairment losses of securities
    32       100  
Write-downs of other real estate owned
    -       227  
Net gain on sale of other real estate owned
    -       (7 )
Deferred income tax benefit
    (53 )     (53 )
Income from bank-owned life insurance
    (366 )     (383 )
Changes in assets and liabilities:
               
       Accrued interest receivable
    22       (88 )
Other assets
    386       349  
       Other liabilities
    (378 )     445  
Net cash provided by operating activities
    3,089       4,652  
INVESTING ACTIVITIES:
               
Securities, held to maturity:
               
Purchases
    -       (13,182 )
Proceeds from calls, maturities, and principal collections
    -       23,949  
Securities, available for sale:
               
Purchases
    (65,842 )     (116,720 )
Proceeds from sales
    50,893       48,168  
Proceeds from calls, maturities, and principal collections
    23,671       25,509  
Purchase of residential mortgages
    (23,888 )     (2,901 )
Loan principal payments, net of originations
    7,580       11,124  
Purchase of Federal Home Loan Bank of Boston stock
    (72 )     -  
Proceeds from sale of other real estate owned
    -       1,003  
Purchases of premises and equipment
    (72 )     (118 )
Purchase of bank-owned life insurance
    (2,000 )     -  
              Net cash used in investing activities
    (9,730 )     (23,168 )
FINANCING ACTIVITIES:
               
Net increase in deposits
    7,200       13,343  
Net change in short-term borrowings
    (7,799 )     250  
Repayment of long-term debt
    (2,000 )     (4,000 )
Proceeds from long-term debt
    14,032       31  
Cash dividends paid
    (1,609 )     (1,410 )
Common stock repurchased
    (1,363 )     (1,946 )
Issuance of common stock in connection with stock option exercises
    153       -  
Excess tax benefits in connection with equity incentive plan
    5       6  
Excess tax benefits in connection with stock option exercises
    18       -  
              Net cash provided by financing activities
    8,637       6,274  
NET CHANGE IN CASH AND CASH EQUIVALENTS:
    1,996       (12,242 )
     Beginning of period
    11,611       28,719  
     End of period
  $ 13,607     $ 16,477  
Supplemental cash flow information:
               
Transfer of loans to other real estate owned
  $ -     $ 538  
Interest paid
    3,820       4,269  
Taxes paid
    51       70  
   
See the accompanying notes to unaudited consolidated financial statements.
 
 
 
 
4

 
 
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES



1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations – Westfield Financial, Inc. (“Westfield Financial,” “we” or “us”) is the bank holding company for Westfield Bank, a federally-chartered stock savings bank (the “Bank”).

Westfield Bank’s deposits are insured to the limits specified by the Federal Deposit Insurance Corporation (“FDIC”).  Westfield Bank operates eleven branches in Western Massachusetts and its primary sources of revenue are income from securities and earnings on loans to small and middle-market businesses and to residential property homeowners.

Elm Street Securities Corporation and WFD Securities Corporation, Massachusetts-chartered security corporations, were formed by Westfield Financial for the primary purpose of holding qualified securities.  In October 2009, WB Real Estate Holdings, LLC, a Massachusetts-chartered limited liability company was formed for the primary purpose of holding real property acquired as security for debts previously contracted by the Bank.

Principles of Consolidation – The consolidated financial statements include the accounts of Westfield Financial, Westfield Bank, Elm Street Securities Corporation, WB Real Estate Holdings and WFD Securities Corporation.  All material intercompany balances and transactions have been eliminated in consolidation.

Estimates – The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of income and expenses for both at the date of the consolidated financial statements.  Actual results could differ from those estimates.  Estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, other-than-temporary impairment of securities, and the valuation of deferred tax assets.

Basis of Presentation – In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of our financial condition as of March 31, 2011, and the results of operations, changes in shareholders’ equity and cash flows for the interim periods presented.  The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results of operations for the year ending December 31, 2011.  Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2010, included in our Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Annual Report”).

Reclassifications - Certain amounts in the prior period financial statements have been reclassified to conform to the current year presentation.
 
 
 
5

 

 
2.  EARNINGS PER SHARE

Basic earnings per share represent income available to shareholders divided by the weighted average number of common shares outstanding during the period.  Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential shares had been issued, as well as any adjustment to income that would result from the assumed issuance.  Potential common shares that may be issued by us relate solely to outstanding stock options and are determined using the treasury stock method.

Earnings per common share for the three months ended March 31, 2011 and 2010 have been computed based on the following:
 
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
   
(In thousands, except per share data)
 
             
Net income applicable to common stock
  $ 1,286     $ 1,354  
                 
Average number of common shares issued
    28,152       29,691  
Less: Average unallocated ESOP Shares
    (1,371 )     (1,460 )
         Average ungranted equity incentive plan shares
    (35 )     (44 )
                 
Average number of common shares outstanding used
               
to calculate basic earnings per common share
    26,746       28,187  
                 
Effect of dilutive stock options
    129       252  
                 
Average number of common shares outstanding used
               
to calculate diluted earnings per common share
    26,875       28,439  
                 
Basic earnings per share
  $ 0.05     $ 0.05  
                 
Diluted earnings per share
  $ 0.05     $ 0.05  

Stock options that would have an antidilutive effect on diluted earnings per share are excluded from the calculation.  At March 31, 2011 and 2010, 1,576,024 and 1,551,024 shares were antidilutive, respectively.
 
 
 
6

 

 
3.  COMPREHENSIVE INCOME/LOSS

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income.  Although certain changes in assets and liabilities are reported as a separate component of the equity section of the balance sheet, such items, along with net income are components of comprehensive income.

The components of other comprehensive income (loss) and related tax effects are as follows:

   
Three Months Ended March 31,
 
   
2011
   
2010
 
   
(In thousands)
 
             
Unrealized holding losses on available-for-sale securities
  $ (1,649 )   $ (470 )
Reclassification adjustment for gains realized in income
    (31 )     (186 )
Other-than-temporary impairment losses on available-for-sale securities charged to earnings
    32       100  
Net unrealized losses on available-for-sale securities
    (1,648 )     (556 )
Tax effect
    570       172  
Net-of-tax amount
    (1,078 )     (384 )
                 
Gains and losses arising during the period pertaining to defined benefit plans
    -       7  
Reclassification adjustments for items reflected in earnings:
               
Actuarial loss
    29       23  
Transition asset
    (3 )     (3 )
Net adjustments pertaining to defined benefit plan
    26       27  
Tax effect
    (9 )     (9 )
Net-of-tax amount
    17       18  
                 
Net accumulated other comprehensive income
  $ (1,061 )   $ (366 )
                 
                 
The components of accumulated other comprehensive loss included in shareholders’ equity are as follows:

 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(In thousands)
 
             
Net unrealized loss on securities available for sale
  $ (6,933 )   $ (5,299 )
Tax effect
    2,383       1,817  
Net-of-tax amount
    (4,550 )     (3,482 )
                 
Noncredit portion of other-than-temporary impairment losses on available-for-sale securities
    (457 )     (443 )
Tax effect
    155       151  
Net-of-tax amount
    (302 )     (292 )
                 
Unrecognized transition asset pertaining to defined benefit plan
    41       44  
Unrecognized deferred loss pertaining to defined benefit plan
    (2,653 )     (2,682 )
Net components pertaining to defined benefit plan
    (2,612 )     (2,638 )
Tax effect
    887       896  
Net-of-tax amount
    (1,725 )     (1,742 )
                 
Net accumulated other comprehensive loss
  $ (6,577 )   $ (5,516 )
                 
 
 
 
7

 
 
4.      SECURITIES

Securities are summarized as follows:
   
March 31, 2011
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
   
(In thousands)
 
Available for sale:
                       
Government-sponsored residential mortgage-backed securities
  $ 356,536     $ 3,740     $ (6,086 )   $ 354,190  
U.S. government guaranteed  residential mortgage-backed securities
    192,375       431       (5,306 )     187,500  
Private-label residential mortgage-backed securities
    7,665       -       (584 )     7,081  
Government-sponsored enterprise obligations
    26,785       203       (900 )     26,088  
    Municipal bonds
    42,049       1,318       (121 )     43,246  
Mutual funds
    5,355       13       (79 )     5,289  
    Common and preferred stock
    39       -       (19 )     20  
                                 
Total
  $ 630,804     $ 5,705     $ (13,095 )   $ 623,414  
                                 


   
December 31, 2010
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
   
(In thousands)
 
Available for sale:
                       
Government-sponsored residential mortgage-backed securities
  $ 381,436     $ 4,967     $ (5,419 )   $ 380,984  
U.S. government guaranteed  residential mortgage-backed securities
    192,609       396       (5,329 )     187,676  
Private-label residential mortgage-backed securities
    8,251       -       (673 )     7,578  
Government-sponsored enterprise obligations
    18,447       193       (776 )     17,864  
Municipal bonds
    42,119       1,298       (340 )     43,077  
Mutual funds
    5,308       25       (61 )     5,272  
Common and preferred stock
    39       -       (23 )     16  
                                 
Total
  $ 648,209     $ 6,879     $ (12,621 )   $ 642,467  
                                 
 
 
 
8

 

 
The amortized cost and fair value of debt securities, excluding mortgage-backed securities, at March 31, 2011, by maturity, are shown below.  Actual maturities may differ from contractual maturities because certain issuers have the right to call or repay obligations.
 
   
March 31, 2011
 
   
Amortized
Cost
   
Fair Value
 
   
(In thousands)
 
Available for sale:
           
Due in one year or less
  $ 270     $ 272  
Due after one year through five years
    20,414       20,977  
Due after five years through ten years
    29,148       29,780  
Due after ten years
    19,002       18,305  
                 
   Total available for sale
  $ 68,834     $ 69,334  
                 

Gross realized gains and losses on sales of securities for the three months ended March 31, 2011 and 2010 are as follows:
 
   
Three Months Ended
March 31,
 
   
2011
   
2010
 
   
(In thousands)
 
             
Gross gains realized
  $ 562     $ 645  
Gross losses realized
    (531 )     (459 )
Net gain (loss) realized
  $ 31     $ 186  
                 
Proceeds from the sale of securities available for sale amounted $50.9 million and $48.2 million for the three months ended March 31, 2011 and 2010, respectively.

The tax provision applicable to net realized gains and losses were $12,000 and $63,000 for the three months ended March 31, 2011 and 2010, respectively.

One security with a carrying value of $2.2 million at December 31, 2010, was pledged as collateral to the Federal Reserve Bank of Boston to secure public deposits.  No securities were pledged to secure public deposits at March 31, 2011.

 
 
9

 
 
 
Information pertaining to securities with gross unrealized losses at March 31, 2011and December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
 

   
March 31, 2011
 
   
Less Than Twelve Months
   
Over Twelve Months
 
   
Gross
Unrealized
Losses
   
Fair Value
   
Gross
Unrealized
Losses
   
Fair Value
 
   
(In thousands)
 
                         
Available for sale:
                       
Government-sponsored residential mortgage-backed securities
  $ (6,086 )   $ 242,757     $ -     $ -  
U.S. government guaranteed  residential mortgage-backed securities
    (5,306 )     155,554       -       -  
Private-label residential mortgage-backed securities
    -       -       (584 )     7,080  
Government-sponsored enterprise obligations
    (900 )     4,098       -       -  
Municipal bonds
    (121 )     17,174       -       -  
Mutual funds
    (3 )     2,727       (76 )     1,552  
Common and preferred stock
    (19 )     20       -       -  
                                 
Total
  $ (12,435 )   $ 422,330     $ (660 )   $ 8,632  
                                 


   
December 31, 2010
 
   
Less Than Twelve Months
   
Over Twelve Months
 
   
Gross
Unrealized
Losses
   
Fair Value
   
Gross
Unrealized
Losses
   
Fair Value
 
   
(In thousands)
 
Available for sale:
                       
Government-sponsored residential mortgage-backed securities
  $ (5,419 )   $ 225,105     $ -     $ -  
U.S. government guaranteed  residential mortgage-backed securities
    (5,329 )     145,430       -       -  
Private-label residential mortgage-backed securities
    -       -       (673 )     7,578  
Government-sponsored enterprise obligations
    (776 )     15,674       -       -  
Municipal bonds
    (340 )     8,856       -       -  
Mutual funds
    -       -       (61 )     1,548  
Common and preferred stock
    -       -       (23 )     16  
                                 
Total
  $ (11,864 )   $ 395,065     $ (757 )   $ 9,142  
                                 

 
10

 

At March 31, 2011, fifty-five government-sponsored and U.S. government guaranteed mortgage-backed securities had gross unrealized losses with aggregate depreciation of 2.8% from our amortized cost basis existing for less than twelve months.  At March 31, 2011, three government-sponsored enterprise obligations had gross unrealized losses with aggregate depreciation of 5.0% from our amortized cost basis existing for less than twelve months.  At March 31, 2011, eight municipal bonds had gross unrealized losses with aggregate depreciation of 2.9% from our amortized cost basis existing for less than twelve months.  These losses are the result of interest rates and not credit quality.  Because we do not intend to sell the securities and it is more likely than not that we will not be required to sell the investments before recovery of their amortized cost basis, no declines are deemed to be other-than-temporary.

At March 31, 2011, one mutual fund had a gross unrealized loss with aggregate depreciation of 4.7% from our cost basis existing for greater than twelve months and was principally related to fluctuations in interest rates.  This loss relates to a mutual fund which invests primarily in short-term debt instruments and adjustable rate mortgage-backed securities.  Because we do not intend to sell the security and it is more likely than not that we will not be required to sell it prior to the recovery of its amortized cost basis, the loss is deemed temporary.

At March 31, 2011, four private label mortgage-backed securities have gross unrealized losses of 7.6% from our amortized cost basis which existed for greater than twelve months.  Management uses a third party on a quarterly basis that is experienced in analyzing private-label mortgage-backed securities to determine if credit losses existed for these securities.  The third party incorporated a number of factors to estimate the performance and possible credit loss of the underlying assets.  These factors include but are not limited to: loans in various stages of delinquency i.e. 30, 60, 90 days delinquent, loans in foreclosure, projected prepayment rates (10 - 20 voluntary prepayment rate), severity of loss on defaulted loans (40% - 55%), current levels of subordination, current credit enhancement (2.62% - 7.47%), vintage (2006), geographic location and projected default rates.  As a result of this analysis, two private label mortgage-backed securities were deemed to have other-than- temporary impairment losses as of March 31, 2011.  During the three months ended March 31, 2011, we had writedowns of $345,000 due to other-than-temporary impairment on mortgage-backed securities, of which $313,000 was recognized in accumulated other comprehensive loss and $32,000 was recognized as a credit loss and charged to income.  During the three months ended March 31, 2010, we had writedowns of $1.1 million due to other-than-temporary impairment on mortgage-backed securities, of which $971,000 million was recognized in accumulated other comprehensive loss and $100,000 was recognized as a credit loss and charged to income.

The following table presents a roll-forward of the amount of credit losses on mortgage-backed securities for which a portion of other-than-temporary impairment was recognized in other comprehensive income:

   
Three Months Ended March 31,
 
   
2011
   
2010
 
   
(In thousands)
 
             
Balance, beginning of period
  $ 425     $ 278  
                 
Additional credit losses for which other-than-temporary impairment charge was previously recorded
    32       100  
                 
Balance, end of period
  $ 457     $ 378  
                 
 
 
 
11

 

 
5.          LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans consisted of the following amounts:
 
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(In thousands)
 
Commercial real estate
  $ 220,307     $ 221,578  
Residential real estate
    134,007       112,680  
Home equity
    36,380       36,116  
Commercial and industrial
    130,999       135,250  
Consumer
    2,795       2,960  
    Total loans
    524,488       508,584  
Unearned premiums and deferred loan fees and costs, net
    868       742  
Allowance for loan losses
    (6,999 )     (6,934 )
    $ 518,357     $ 502,392  

During the three months ended March 31, 2011 and 2010, we purchased residential real estate loans aggregating $23.9 million and $2.9 million, respectively.

We have transferred a portion of our originated commercial real estate loans to participating lenders.  The amounts transferred have been accounted for as sales and are therefore not included in our accompanying consolidated balance sheets.  We share ratably with our participating lenders in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan.  We continue to service the loans on behalf of the participating lenders and, as such, collect cash payments from the borrowers, remit payments (net of servicing fees) to participating lenders and disburse required escrow funds to relevant parties.  At March 31, 2011 and December 31, 2010, we serviced loans for participants aggregating $5.1 million and $5.2 million, respectively.

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets.  The unpaid balances of these loans totaled $3.5 million and $3.9 million at March 31, 2011 and December 31, 2010, respectively.  Net service fee income of $2,000, and $3,000 was recorded for three months ended March 31, 2011 and 2010, and is included in service charges and fees on the consolidated statements of income.

Loans are recorded at the principal amount outstanding, adjusted for charge-offs, unearned premiums and deferred loan fees and costs.  Interest on loans is calculated using the effective yield method on daily balances of the principal amount outstanding and is credited to income on the accrual basis to the extent it is deemed collectible.  Our general policy is to discontinue the accrual of interest when principal or interest payments are delinquent 90 days or more based on the contractual terms of the loan, or earlier if the loan is considered impaired.  Any unpaid amounts previously accrued on these loans are reversed from income.  Subsequent cash receipts are applied to the outstanding principal balance or to interest income if, in the judgment of management, collection of the principal balance is not in question.  Loans are returned to accrual status when they become current as to both principal and interest and when subsequent performance reduces the concern as to the collectability of principal and interest.  Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income over the estimated average lives of the related loans.

The allowance for loan losses is established through provisions for loan losses charged to expense.  Loans are charged-off against the allowance when management believes that the collectability of the principal is unlikely.  Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.  The allowance consists of general and allocated components, as further described below.
 
 
 
12

 

 
General component

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, commercial and industrial, and consumer.  Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment.  This historical loss factor is adjusted for the following qualitative factors: trends in delinquencies and nonperforming loans; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; and national and local economic trends and industry conditions.  There were no changes in our policies or methodology pertaining to the general component of the allowance for loan losses during 2010.

The qualitative factors are determined based on the various risk characteristics of each loan segment.  Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate – We require private mortgage insurance for all loans originated with a loan-to-value ratio greater than 80 percent and do not grant subprime loans.  All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower.  The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

Commercial real estate – Loans in this segment are primarily income-producing investment properties throughout New England.  The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment.  Management obtains rent rolls and tax returns annually and continually monitors the cash flows of these loans.

Commercial and industrial loans – Loans in this segment are made to businesses and are generally secured by assets of the business.  Repayment is expected from the cash flows of the business.  A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

Consumer loans – Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.

Allocated component

The allocated component relates to loans that are classified as impaired. Impaired loans are identified by analysis of loan performance, internal credit ratings and watch list loans that management believes are subject to a higher risk of loss.  Impairment is measured on a loan by loan basis for commercial real estate and commercial and industrial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.  An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, we do not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.
 
A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
 
 
 
13

 

 
We may periodically agree to modify the contractual terms of loans.  When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”).  All TDRs are initially classified as impaired.

An analysis of changes in the allowance for loan losses for the three months ended March 31, 2011 and 2010 is as follows:
 
   
Residential
Real
Estate
   
Commercial
Real
Estate
   
Commercial
and
Industrial
   
Consumer
   
Total
 
   
(In thousands)
 
March 31, 2011
                             
Balance, beginning of period
  $ 877     $ 3,182     $ 2,849     $ 26     $ 6,934  
Provision
    127       (9 )     234       (13 )     339  
Charge-offs
    -       -       (355 )     (4 )     (359 )
Recoveries
    1       4       69       11       85  
Balance, end of period
  $ 1,005     $ 3,177     $ 2,797     $ 20     $ 6,999  
                                         
March 31, 2010
                                       
Balance, beginning of period
  $ 487     $ 2,371     $ 4,748     $ 39     $ 7,645  
Provision
    43       84       385       (12 )     500  
Charge-offs
    (1 )     -       (607 )     (8 )     (616 )
Recoveries
    1       -       8       13       22  
Balance, end of period
  $ 530     $ 2,455     $ 4,534     $ 32     $ 7,551  
                                         

Further information pertaining to the allowance for loan losses by segment at March 31, 2011 and December 31, 2010 follows:

   
Residential
Real
Estate
   
Commercial
Real
Estate
   
Commercial
and
Industrial
   
Consumer
   
Total
 
   
(In thousands)
 
March 31, 2011
                             
Allowance for loan and lease losses:
                             
Individually evaluated for loss potential
  $ -     $ 419     $ 36     $ -     $ 455  
Collectively evaluated for loss potential
    1,005       2,758       2,761       20       6,544  
Total
  $ 1,005     $ 3,177     $ 2,797     $ 20     $ 6,999  
                                         
Loans and leases outstanding:
                                       
Individually evaluated for loss potential
  $ 123     $ 15,859     $ 2,349     $ -     $ 18,331  
Collectively evaluated for loss potential
    170,264       204,448       128,650       2,795       506,157  
Total
  $ 170,387     $ 220,307     $ 130,999     $ 2,795     $ 524,488  
                                         
December 31, 2010
                                       
Allowance for loan and lease losses:
                                       
Individually evaluated for loss potential
  $ -     $ -     $ 19     $ -     $ 19  
Collectively evaluated for loss potential
    877       3,182       2,830       26       6,915  
Total
  $ 877     $ 3,182     $ 2,849     $ 26     $ 6,934  
                                         
Loans and leases outstanding:
                                       
Individually evaluated for loss potential
  $ 125     $ 1,891     $ 539     $ -     $ 2,555  
Collectively evaluated for loss potential
    148,671       219,687       134,711       2,960       506,029  
Total
  $ 148,796     $ 221,578     $ 135,250     $ 2,960     $ 508,584  
                                         
 
 
 
14

 

 
The following is a summary of past due and non-accrual loans by class at March 31, 2011 and December 31, 2010:
                                     
   
30 – 59
Days Past
Due
   
60 – 89
Days Past
Due
   
Greater
than 90
Days Past
Due
   
Total Past
Due
   
Past Due
90 Days or
More and
Still
Accruing
   
Loans in
Non-
Accrual
 
   
(In thousands)
 
March 31, 2011
                                   
Residential real estate:
                                   
Residential 1-4 family
  $ 410     $ 238     $ 51     $ 699     $ -     $ 617  
Home equity
    203       -       117       320       -       121  
Commercial real estate
    14,465       283       640       15,388       -       1,859  
Commercial and industrial
    4,959       -       150       5,109       -       1,349  
Consumer
    6       -       -       6       -       -  
Total
  $ 20,043     $ 521     $ 958     $ 21,522     $ -     $ 3,946  
                                                 
December 31, 2010
                                               
Residential real estate: